2Introduction In competitive analysis consumers are the major players influencing firm’s competitive position. Consumers affect firm’s competitive position through their demands for firm’s production. Thus, it is essential to know how consumers’ demand for good and services is formed and what factors causes changes in their demand. This lecture focuses on consumer behavior and shows how consumer’s demands for goods and services are created. The emphasis here is on the microeconomic aspects of consumption and how consumption decisions are influenced by income, prices, taste, expectations and the availability and prices of different goods (substitutes and complements). This lecture utilizes the concept of elasticitiesto explain reactions in consumption decisions to price and income changes. In addition to the basics of demand theory, the lecture provides answers for the following questions: 1. How do we decide how much of a good to buy? 2. How does a change in price affect the quantity we purchase or the amount of money we spend on a good? 3. What factors other than price affect our consumption decisions? Concepts you will learn Demand Ceteris ParibusMarket Demand Law of Demand Utility Demand Curve Total Utility Price Elasticity of Demand Marginal Utility Total Revenue Law of Diminishing Marginal Utility

3Lecture Outline I. Patterns of ConsumptionA. How Consumer Dollars Are Spent- (Figure 4.1)1. 75% of household budgets are spent on housing, transportation and food. 2. ”Essential” items have changed from years ago. a. Cell phones b. CD players II. Determinants of Demand - what determines what we buy? A. The Sociopsychiatric Explanation -The desire for goods and services arises from our needs for social acceptance, security, and ego gratification. 1. ”Keeping up with the Joneses” 2. Self preservation 3. Expressions of affluence (Figure 4.2) 4. Headline:“Men vs. Women: How They Spend” The Bureau of Labor Statistics (BLS) concludes that men and women spending patterns are different. Consumer patterns vary by gender, age, and other characteristics. Economists try to isolate the common influences on consumer behavior. B. The Economic Explanation - why we purchase goods.1. Prices and income are just as relevant to consumption decisions as are more basic desires and preferences. 2. DemandfDefinition: Demand- The ability and willingness to buyspecific quantities of a good at alternative prices in a given time period, ceteris paribus. 3. Tastes- (desire for this and other goods) fExample: If a study says one glass of wine a day is good for your health, the demand for wine would increase.

This
preview
has intentionally blurred sections.
Sign up to view the full version.